THE 'SCARS' OF UNEMPLOYMENT: LOWER EARNINGS AND A HIGHER CHANCE OF BEING JOBLESS AGAIN IN THE FUTURE

The costs of unemployment, particularly repeated unemployment, are much higher than the immediate loss of earnings. According to new research published in the Economic Journal, the experience of unemployment inflicts longer-term 'scars': both the increased likelihood of future unemployment and lower subsequent earnings in employment. These findings not only provide support for policies that will reduce unemployment; they also point up the need to include these future effects in any assessment of the costs of unemployment and equally in the evaluation of programmes to reduce it.

The symposium of three papers - by Wiji Arulampalam, Paul Gregg, and Mary Gregory and Robert Jukes - suggests that redundancy ranks behind only bereavement and divorce as a life-disrupting event. Even once the immediate trauma is past, the damage persists. Unemployment tends to bring with it future unemployment; and job displacement tends to be followed by a lower trajectory for future earnings.

What is more, the researchers suggest, these two effects may well be related, with lower earnings potential leading to an extended period of job search before a suitable job match is found or the person drifts into economic inactivity. Together, the scarring effects of unemployment will be particularly damaging in exacerbating lifetime inequality, bringing the threat of poverty and social exclusion.

The three studies use longitudinal surveys and administrative data to address the issue of the scarring effects of unemployment by tracking the individual labour market experiences of large numbers of British men over the 1980s and 1990s. Datasets available for Britain provide exceptionally suitable test-beds for this kind of analysis.

Wage Scars

The studies find evidence of significant wage penalties arising from employment interruptions. Arulampalam's paper, which analyses data from the British Household Panel Survey, suggests that the wage penalty attached to a spell of unemployment after re-entry takes an inverted U-shape, rising from 6% to a peak of about 14% after about three years after returning to work, before declining to about 11%.

She also finds that it is the first experience of unemployment that has the largest scar - 21.5% - and that wage penalties are attached not only to the re-entry job but also to the job after that. These findings suggest the importance of avoiding unemployment spells in the first place, and of providing enough training for people to avoid further scars.

Gregory and Jukes analyse a very large sample constructed from the linked New Earnings Survey Panel Dataset and the Joint Unemployment and Vacancies Operating System. They split the scarring effect of unemployment into two components: the job interruption itself; and the duration of the unemployment spell. The wage penalty from a job interruption is around 10% in the first year, decreasing to a long run or permanent penalty of 2%.

A further wage penalty varies directly with the length of the unemployment spell, and has no tendency to diminish as the unemployment experience recedes into the past. This duration penalty is around 5% for those with a six-month spell of unemployment, rising to just over 11% for those who had been out of work for a year. The future wage losses are most severe for men in the over-45 age group.

Unemployment Scars

Gregg addresses the issue of how unemployment experiences as young adults contribute to unemployment in adulthood, His paper, which draws on the National Child Development Survey, examines whether the cumulated experience of unemployment from ages 16 to 23 is correlated with that from ages 28 up to age 33. The results highlight how the experience of unemployment is concentrated on the same minority of the workforce over these extended time periods. For example, men who had no unemployment prior to age 23 (over half the sample) spent just 1.5% of months out of work between the ages of 28 and 33. But those with more than a year out of work by age 23 (around 8% of the sample) spent 19% of the months after age 28 unemployed.

Gregg's research suggests that low educational attainment, ability not captured by education, financial deprivation and behavioural problems in childhood do raise a person's susceptibility to unemployment and explain around a half of the persistence in unemployment experiences. There is strong evidence of persistent effects of early unemployment experience for men. In contrast, there is evidence of only minor persistence in unemployment for women and then only when the women experienced at least a year of unemployment before age 23.

Notes for Editors: The symposium on 'Unemployment Scarring' is published in the November 2001 issue of the Economic Journal: 'Is Unemployment Really Scarring? Effects of Unemployment Experiences on Wages' by Wiji Arulampalam (University of Warwick); 'The Impact of Youth Unemployment on Adult Unemployment in the NCDS' by Paul Gregg (University of Bristol); and 'Unemployment and Subsequent Earnings: Estimating Scarring among British Men 1984-94' by Mary Gregory (University of Oxford) and Robert Jukes (Queen Mary and Westfield College, London).

For Further Information: contact RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com); Paul Gregg on 0117-928-9083 (email: p.gregg@bristol.ac.uk); Mary Gregory on 01865-271951 (email: mary.gregory@economics.ox.ac.uk); or Wiji Arulampalam on 024-7652-3471 (email: wiji.arulampalam@warwick.ac.uk);